The U.S. Securities and Exchange Commission (SEC) charged a media and entertainment company with conducting unregistered securities sales when it sold non-fungible tokens (NFTs) to investors between October and December 2021.
Impact Theory, a Los Angeles-based company that produces entertainment and educational content, including several podcasts, is said to have raised nearly $30 million through the sale of its NFT called Founder’s Keys, which comes in three tiers.
According to the SEC, the company “encourages potential investors to view the purchase of Founders Keys as an investment in the business” and:
“The theory of impact emphasizes that it is ‘trying to build the next Disney’ which, if successful, would deliver ‘substantial value’ to the founder’s primary buyer.”
The SEC found that NFTs are investment contracts, and therefore securities, and that the company violated the Securities Act of 1933 by selling them without registration. It issued a cease and desist order, which Influence Theory agreed to.
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Under the SEC’s order, the company was ordered to pay disgorgement, prejudgment interest and civil penalties totaling more than $6.1 million, without acknowledging or denying the agency’s findings. Additionally, a fund will be created to return funds to investors in founder key NFTs. Impact Theory will destroy all Founders Keys it owns or controls, post order notices on its website and social media channels, and will not receive royalties from future sales of NFTs on the secondary market.
According to NFT Stats, the Key NFT of the “legendary” (top) founder was last sold for $1,468 two days ago, making it one of last week’s 10 sales. The token supply is 13,572 with 4,620 owners. The Founders Key is simply a set of NFTs provided by the company. They had not responded to Cointelegraph’s inquiries by press time.
how it started how it went pic.twitter.com/REUcdwwY0k
— ZachXBT (@zachxbt) August 28, 2023
This is the first SEC enforcement action involving NFTs, SEC Commissioners Hester Peirce and Mark Uyeda wrote in their dissent to the action. “NFTs are not stock in a company and do not yield dividends of any kind for purchasers,” they wrote.
“We share our colleagues’ concern that the hype will entice people to spend nearly $30 million on NFTs that they don’t seem to understand how they’re going to use, enjoy, or profit from. […] However, such legitimate concerns are not sufficient to bring the matter under our jurisdiction. ”
The promises made by Impact Theory and those cited in the SEC order “are not promises to constitute an investment contract.” Commissioners compared promises about NFTs to claims made by collectible sellers. They went on to present a list of nine questions the agency should consider before pursuing an NFT case:
“Whatever one thinks about Howey’s analysis, this issue raises larger questions that the Commission should address before bringing more NFT cases.”
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